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South Africa: Energy Futures Contested
AfricaFocus Bulletin
March 30, 2015 (150330)
(Reposted from sources cited below)
Editor's Note
The energy crisis in South Africa, with regular "load-shedding" due
to shortages of power from the monopoly utility Eskom, is now at the
top of the political agenda, featuring in President Jacob Zuma's
State of the Nation Address in February and in ongoing disputes
about who is responsible and when the situation can be fixed. The
long-term strategy to exit the crisis and begin a transition to a
sustainable energy system is also marked by strong disagreements
between utility and government officials and their critics.
The debate about management at Eskom and its political fallout is
beyond the scope of AfricaFocus coverage (see
http://tinyurl.com/ntkcmcw for a recent update).
But the long-term issues of South Africa's energy strategy are relevant far beyond
that country's borders. That debate is often technical, with
projections of options based on widely varying assumptions. But the
basic lines of debate are clear: (1)the current policy of doubling
down on coal while rapidly increasing nuclear and gas generation,
with a relatively minor role for new renewable energies such as
solar and wind, versus (2) calls for a much more rapid introduction
of new renewable energy capacity, both into the electrical grid and
in "embedded" supply, such as rooftop panels and even solar-powered
generators.
This AfricaFocus Bulletin contains excerpts from a October 2014
48-page report from the World-Wide Fund for Nature - South Africa,
which outlines and critiques the current government plan for the
period through 2030, and presents an alternative scenario with more
rapid introduction of new renewable technologies.
The main point of the critique is clear. The rationale for a more
rapid shift from fossil fuels is not only the damage to the present
and future environment they cause. It is also that technology and
the business environment at the global level are rapidly enhancing
the potential for solar and wind, for countries at all levels of
economic development. Even the presumed disadvantage of the
variability of these energy sources is being addressed by
extraordinarily rapid advances in battery storage and grid
management.
An essential source on the renewable energy scene world-wide, with
occasional articles on South Africa, is Greentech Media
(http://www.greentechmedia.com/). Global developments are highly
relevant for Africa, because technology is developing rapidly, and
investors worldwide are looking for new alternatives not only in
developed countries but also rising and middle-income countries
including South Africa.
Two recent reports on the world energy scene document the rapidly
changing technological and cost landscape:
"Renewable Power Generation Costs in 2014", International Renewable
Energy Agency (IRENA), January 2015
http://tinyurl.com/oowgk7r
and
"Stranded Assets and Subcritical Coal: The Risk to Countries and
Investors," University of Oxford Smith School of Enterprise and the
Environment, March 2015
http://tinyurl.com/ndnaejg
Other relevant sources on South African energy of particular
interest:
President Jacob Zuma, State of the Nation Address, Feb. 12, 2015
http://www.gov.za/state-nation-address-2015
Patrick Bond, "Zuma's Business-as-Usual Approach to South Africa's
Energy Crisis," Counterpunch, Feb. 18, 2015
http://tinyurl.com/q52zycm
Roundup article on new utility-scale solar plants in South Africa
Mybroadbank South Africa, Feb. 10, 2015
http://tinyurl.com/p5q5gqf
KaXu Solar One (concentrated solar power plant) launched at Pofadder
near Namibian border, Mail and Guardian, March 5, 2015
http://tinyurl.com/qdrckb9
"Wind Energy Outperforms Expectations, says ESKOM," South African
Wind Energy Association, Nov. 5, 2014
http://tinyurl.com/pmdwv9z
For previous AfricaFocus Bulletins on climate change and the
environment, see http://www.africafocus.org/intro-env.php
++++++++++++++++++++++end editor's note+++++++++++++++++
Renewable Energy Vision 2030 – South Africa
World-Wide Fund for Nature (WWF), South Africa
October 2014
Excerpts only. Full text available at
http://www.wwf.org.za / direct URL: http://tinyurl.com/pf8anra
Introduction
Background
Government plans for meeting South Africa's growing electricity
demand needs are outlined in the Integrated Resource Plan for
Electricity (IRP) of 2010. The plan contains long-term electricity
demand projections, and details of how demand should be met in terms
of generation source, capacity, timing and cost.
In late 2013, a draft update of the IRP was published for public
comment. This outlined the optimal energy mix in a variety of
scenarios linked to economic growth, the energy intensity of the
economy, and various other factors and events.
In the Base Case scenario, premised on average economic growth
exceeding 5% per annum and full implementation of the National
Development Plan (NDP), there is a gradual ramp-up of renewable
energy capacity to 9% of South Africa's total electricity supply
capacity by 2030 (DOE 2013). Even in this optimistic scenario,
generation from new coal-fired and nuclear plants will dwarf the
share of electricity produced from renewable sources.
Further, should economic growth continue to be hover around current
levels of 2-3% due to weak international demand, RE will only
account for 6% of the country's electricity supply by 2030 1 .
Continued reliance on coal-fired power for more than two-thirds of
South Africa's electricity requirements suggests that there will be
on-going competition between the energy and agricultural sectors for
scarce arable land and water resources, threatening the delicate
balance in the food- energy-water nexus.
WWF Plan of Action
The WWF calls for a more ambitious plan, suggesting that the IRP
should provide for an 11-19% share of electricity capacity by 2030,
depending on the country's growth rate over the next fifteen years.
The basis for this proposal is outlined in detail in this report,
and relies on a scenario-based approach to energy planning similar
to that used by the Department of Energy (DOE).
For the purposes of this document, renewable sources comprise solar
photovoltaic power (solar PV) and concentrated solar power (CSP), as
well as wind-generated energy. Hydro-electric power is excluded due
to concerns over the environmental impact of large hydro-electric
power plants. Also excluded are sources such as landfill gas and
biogas, given the relatively small role they play in Government's
plans to procure electricity from RE sources.
For present purposes, RE comprises solar PV and CSP as well as windgenerated
power. 'High demand' corresponds to the Base Case scenario
in the IRP Update, while 'low demand' corresponds to the Weathering
the Storm scenario
In the WWF's vision of the future, growing RE capacity comes at the
expense of new coal-fired and nuclear capacity, with intermittency
and dispatchability issues being countered by thermal and energy
storage capacity, as well as by flexible gas-turbine generation. In
addition to the obvious environmental benefits of this scenario, it
will enable South Africa to add flexibility to energy supply
capacity on an on-demand basis. In an environment of significant
uncertainty regarding future electricity demand, the WWF considers
this to be the most sensible approach.
The annual capital requirement associated with this goal is
estimated to be R40-R80 billion in current Rand terms, depending on
the rate of economic growth and the associated growth in electricity
demand. In light of significant investor appetite for South African
RE assets to date, the WWF believes that pools of private capital,
notably from local retirement funds that manage approximately R3
trillion in savings, will support this requirement.
A growing demand from international institutional investors for
high-quality infrastructure assets such as renewable energy plants
further informs the organisation's expectations. Longer-term
investments with relatively stable, predictable yields and low
market correlations are perceived as valuable components of
retirement fund portfolios, which have long-term obligations towards
their members.
From a developer perspective, retirement funds may become
increasingly attractive as cost-effective, supplementary providers
of debt financing. This is especially true as banks are likely to
raise pricing on project debt as a result of new regulations.
Further, their appetite for extending further debt will depend
largely on the degree of secondary market interest in the purchasing
debt that they originate.
When it comes to financing for empowerment equity takes, this is
already in short supply for RE projects, which presents another
avenue of opportunity for retirement funds. In particular, financing
the shares of black owned partners is expensive and scarce. A
subsequent paper explores the participation of retirement funds in
RE financing in more detail.
...
Utility-Scale Renewable Energy in South Africa: Past, Present And
Future
Despite being critiqued for its heavy reliance on coal-fired power
in the past, South Africa has recently developed what is arguably
one of the most successful IPP-driven renewable energy programmes
globally. It has hosted the fastest-growing clean energy market
over the past five years, and is now one of the world's most
attractive RE investment destinations (Pew 2014).
Further, RE is strategically viewed as an avenue through which the
South African Government can respond to the challenge of climate
change, improve energy security by diversifying sources of energy
supply, and propel green growth through localisation and empowerment
(DME 2003). The importance of developing the RE sector is further
underscored by its inclusion as an integrated strategic project in
the National Infrastructure Plan. This is overseen by the
Presidential Infrastructure Coordinating Committee, and is aimed at
catalysing development and growth in South Africa 3 .
The Renewable Energy Independent Power Producer Procurement
Programme (REIPPPP), introduced in 2011, has by all accounts been
very successful in quickly and efficiently delivering clean energy
to the grid. Over six rounds of this programme, Government aims to
develop private sector RE projects with a production capacity of 6
725 megawatts (MW) using a competitive bidding process. A total of 3
916 MW was allocated through the first three rounds.
During the first half of 2014, the Department of Energy opened a
CSP-only bid window of 200 MW, and a fourth bid window of 1 105 MW
covering PV, wind and other technologies. Favourable developments
with respect to the RE price trajectory have been central to this
development. Increasingly competitive bidding rounds have led to
substantial price reductions, and current contracting of RE at
internationally comparable tariffs supports the technology's
potential as an affordable future source of electricity supply.
In three short years, wind and solar PV have reached pricing parity
with supply from new coal-fired power stations from a levelised cost
of electricity (LCOE) perspective. LCOE represents the cost per
kilowatt hour of constructing and operating a power plant over a
specified lifecycle, taking into account factors including cost of
capital and the anticipated plant load factor. In the case of the
REIPPPP, it is reflected by the bid tariff, which recovers plant
cost over a 20 year power purchase agreement (PPA) period.
In bidding window 3 of August 2013, the average tariffs bid for wind
and solar PV were R0.66/kWh and R0.88/kWh respectively, well below
the recent estimates of R1.05/kWh for supply from the coal-fired
Medupi and Kusile power stations (Papapetrou 2014). In 2013, the
average levelised cost of electricity supplied to the grid was
R0.82/kWh (Donnelly 2014), so wind-generated power has already
achieved pricing parity with the grid.
CSP, while still expensive in relative terms, costs less than the
alternative peaking supply option, namely diesel-powered open-cycle
gas turbines. Bid at an average of R1.46/kWh in REIPPP Round 3, a
two-tiered tariff structure would enable CSP to be supplied into the
grid during peak hours at R3.94/kWh , which is cheaper than the
alternative peaking supply option from gas turbines.
In a constrained energy supply environment, renewables now present a
savings opportunity. This is a radical departure from conventional
thinking, which positions renewables as a more expensive source of
power. Generation by mid-merit coal and diesel power plants, the
latter currently running in excess of a 20% load factor, is
significantly more expensive.
At the Wind Energy Summit South Africa, held earlier this year
(2014), National Treasury indicated that had the 4 GW 6 of RE
procured under the REIPPPP already been connected by 1 January 2013,
South Africa would have saved a staggering R11 billion in avoidable
fuel costs through the displacement of these particularly expensive
fossil fuel energy sources.
...
Government Targets and Future Planning
The Integrated Resource Plan for Electricity (IRP) articulates the
principles and logic employed by the DOE to guide day-to-day
decision-making regarding new investment in energy production
capacity. Together with the Strategic Grid Plan and the Transmission
Development Plan, this informs policymakers' views on decisionmaking
and expenditure priorities in generation, transmission and
distribution. All three of these documents are regularly updated to
take into account changing conditions.
The draft IRP 2010-2030 Update Report (IRP Update), released by the
DOE in November 2013, therefore models the 2030 energy mix according
to various scenarios. This indicates the impact of different
assumptions, including economic growth outcomes, climate change
mitigation policy and large-scale strategic investments.
Optimisation takes place on a constrained least-cost basis (i.e. the
lowest cost of meeting South Africa's energy demand requirements is
sought, subject to certain policy-driven or practical thresholds and
ceilings).
From the WWF's perspective, there are several critical and debatable
assumptions that may result in suboptimal investment decisions in
RE. These relate to energy demand, pricing and hard-coded limits on
procurement of new RE capacity. As a result, even in the optimistic
Base Case scenario, the share of renewables in South Africa's
electricity generation capacity by 2030 is only 9%.
Given the higher base levels and substantial renewable capacity
growth rates seen in comparable emerging markets, it is likely that
this achievement will be relatively unimpressive in international
context. Brazil and Chile have already exceeded South Africa's
targeted renewables share for 2030, while China and Turkey will
achieve parity within the next three years if their growth in the
share of RE over the past three years continues at the same rate.
...
From this discussion [of demand for electricity], it is clear that a
great deal of uncertainty exists regarding real electricity demand
in the coming 20 years. The optimal response is to plan flexibly,
using power sources that can be procured in modest increments and
brought on-line quickly and as required. RE plants fit this brief
due to their modular nature and the fact that they can be speedily
constructed as needed.
Relative Cost
The relative cost of the various electricity sources is another
critical deciding factor, determining which energy mix will deliver
on demand. All technologies in the figure below [see full report for
figure] are evaluated on the basis of the LCOE to ensure direct
comparison. From this it is evident that the LCOEs for coal and
nuclear in the IRP Update are low relative to recent independent
international estimates, which are approximately 20-25% higher (Citi
Research 2013).
While the IRP Update estimate for coal may be accurate for old coalfired
plants, it will not apply to the Medupi and Kusile power
plants, which will generate much more expensive power and comprise
20-25% of the coal-fired plant mix by 2030. Further, the carbon tax
mooted by Government will have a greater impact on coal-fired power
than any other energy source, given its carbon intensity. The
nuclear power LCOE is understated to an even greater degree in the
IRP Update, although much uncertainty regarding actual costs is
acknowledged. By contrast, RE levelised costs - even at the 2012
value of the Rand - are higher than the tariffs that were bid in
2013, erring on the high side. In particular, the LCOE calculation
for solar PV seems too conservative by some margin. The net result
of this mix of LCOE calculations [in the government's IRP Update] is
a decision-making lens biased towards coal and nuclear in
determining the optimal energy mix for South Africa. In reality,
solar PV and wind already compete favourably with the more
traditional alternatives of new coal and nuclear from an LCOE
perspective.
Furthermore in the IRP Update the contribution of renewables is
limited by hard-coded caps placed on the growth of capacity in solar
PV and wind technology without justification from a technical
feasibility perspective.
Annual additions to wind capacity are limited to 1 600 MW and solar
PV to 1 000 MW. The justification for the wind limit is based on
observed historical wind construction rates in a reference country,
namely Spain. However, several large economies, including Italy,
Germany and Japan, added more than this capacity during 2012. The
cap on solar PV is imposed somewhat arbitrarily to “limit the major
switch to this technology” resulting from assumed learning rates
(DOE 2013: 19). In reality, rapidly declining solar PV prices have
supported the technology, recently overtaking wind as the fastest
growing clean energy source globally . It is understood that the DOE
is currently starting to experiment with removing these constraints
.
Gas is, however, viewed as an alternative to RE and a potential
game-changer. In the IRP Update's Big Gas scenario, large scale
exploitation of shale gas resources in the Karoo and the gas fields
of Mozambique results in a rapid switch to a gas-dominated energy
mix, with renewables playing a much smaller role than in the Base
Case. Critical assumptions include availability of gas and water,
which is unpredictable in the case of shale; timing of access to
these regional gas resources, which will probably only occur in
2025; and a substantial reduction in the gas price to R50/GJ in
2035. As with renewables, there are significant new transmission
requirements associated with gas, as generation may not take place
at a load centre. Furthermore, substantial pipeline and gas terminal
storage costs may be incurred. These will tend to push up the
relative price of gas, even if regional sources can be competitively
procured at source.
...
Conclusions and Recommendations
The WWF is optimistic that South Africa can achieve a much more
promising clean energy future than current plans allow for. With an
excellent solar resource and several very good wind-producing
pockets, the country is an ideal candidate for an RE revolution.
We have shown in this report that the levelised cost of producing RE
already competes favourably with the three main alternatives, namely
coal, gas and nuclear, and that a broader RE base would contribute
to a more climate-resilient future and insulate South Africa from
dependence on expensive and unreliable fuel sources priced in
dollars. Critical from a planning perspective, RE can also provide
added flexibly on an 'as needed' basis, as electricity demand grows.
This is vital in a highly uncertain environment.
In support of our vision, we call for several further actions
related to RE in general. Firstly, comprehensive systems analysis
needs to be undertaken in order to identify in greater detail grid
suitability in high renewables penetration scenarios such as those
outlined in this paper. This will inform the ideal mix across wind,
PV and CSP technologies on an annual basis, as well as set out
additional balancing supply requirements. Broadly speaking, it is
understood that balancing gas capacity should be approximately 33%
additional to renewable capacity, but this needs to be explored
further.
Secondly, in procuring new electricity capacity Government should
create incentives that are designed to relieve some of its most
significant fiscal and grid constraints. Developers should be
incentivised to connect to the grid where spare capacity exists to
do so. Even more importantly, generation at close proximity to load
requirements should be promoted in order to minimise strain on the
ageing transmission network. Support for a distributed generation
sector may be achieved through reforming a currently highly
centralised electricity sector, including an easy utility licensing
process and third-party grid access for supply of excess electricity
at a predetermined tariff. Achieving more diversified electricity
markets will boost prospects for developers and equipment suppliers,
and reduce risk for banks and other investors. South Africa could
then truly be positioned as a green manufacturing hub to service the
broader Sub-Saharan region.
Thirdly, Government needs to commit to firmer policy on renewables
and, in particular, to a longer- term RE procurement plan, subject
to electricity demand growth. This will lay a foundation for deeper
investment by developers participating in the REIPPPP, while
simultaneously supporting the continued cost competitiveness of RE
in South Africa. This should be accompanied by a coherent and
consistent set of developer requirements in order to create a
smoother implementation process.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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